Cafeteria Plan Temporary and Proposed Regulations

HIPAA

Medical FSA`s

Teacher`s Post Retirement Life Insurance

Long-term Care Policies

Adoption Assistance

Social Security Highlights

1999 Tax Brackets

TEMPORARY AND PROPOSED REGULATIONS FOR CAFETERIA PLANS ARE DELAYED

In Announcement 98-105, the Internal Revenue Service said  it is delaying the effective date of the cafeteria plan temporary and proposed regulations.

Cafeteria plan rules under the proposed and temporary regulations would conform with the 1996 Health  Insurance Portability and Accountability Act, and clarify events in which cafeteria plan participants would be able to change their plan elections during a plan year.

The proposed and temporary regulations were intended to be effective December 31, 1998. The IRS, in Announcement 98-105 of November 23, 1998, said the regulations would not be effective before plan years beginning at least 120 days after further guidance is issued. This means that in the case of a calendar year plan, the 1997 temporary and proposed regulations will not be effective for 1999.

The IRS said, until further guidance is issued, taxpayers could rely on changes in election provisions of the 1997 temporary regulations as well as the pre-1990 proposed regulations concerning change in election provisions of Section 1.25-2. According to the IRS, both alternatives are available regardless of whether the plan document has been amended to conform to the 1997 temporary regulations.

Health Insurance>Portability and Accountability Act of 1996 (HIPAA)

WHEN DO PLAN AND ISSUERS NEED TO START PROVIDING CERTIFICATES OF CREDITABLE COVERAGE?

Plan or issuers do not need to provide certificates before June 1, 1997. However, certain certification requirements apply to periods of coverage and events that occur after June 30, 1996.

By June 1, 1997, plans or issuers must arrange to have certificates delivered to ALL individuals who lost coverage, or who began or ended COBRA between October 1, 1996, and May 31, 1997. Plans or issuers have an option of providing notice instead of an actual complete certificate, provided that the plan or issuer furnishes a certificate on request.

After June 1, 1997, plans or issuers must arrange to provide certificates in a timely manner to individuals as they lose coverage, or begin or end COBRA.

By July 1, 1998, plans or issuers must also provide certificates with the names and individual dates of coverage of all dependents.

Sec. 125 Plans

Medical FSAs

Under the IRS proposed regulations, employees who take FMLA leave must be permitted to continue coverage under a medical FSA while on FMLA leave or revoke an existing FSA election for the remainder of the coverage period. As long as coverage is continued under FMLA leave, the full amount of the elected coverage minus any prior reimbursements must be available to the employee at all times, including the FMLA leave period.

However, if an employee`s FSA terminates while the employee is on FMLA leave, the employee is not entitled to receive reimbursements for the remainder of that period. If that employee is eventually reinstated, he or she cannot retroactively elect FSA coverage.

Furthermore, employees must be allowed to reinstate their health FSAs once they return from FMLA leave on the same terms as prior to taking the leave. The proposed regulations also specify that an employer cannot force a returning employee whose coverage was terminated while on FMLA leave to reinstate coverage.

Under the Section 125 uniform reimbursement rule, an employee with a health FSA may be reimbursed for the full amount of elected benefits (reduced by prior reimbursements), even though he or she had not made a corresponding amount of premium payments into the account. This imposes an additional risk on employers that sponsor flex plans. The IRS proposed regulations clarify that the uniform reimbursement rule applies to employees on FMLA leaves. This rule exacerbates the risk associated with the uniform reimbursement requirement, since family and medical leaves, by their nature, tend to involve higher medical expenses. Thus, an employee who terminates employment after taking family or medical leave might be more inclined to try to recover the entire elected benefit, even though he or she has not contributed the promised amount of premiums to the plan.

If an employee`s coverage under a medical FSA terminates while he or she is on FMLA leave, the employee may not claim reimbursement for expenses incurred while coverage was terminated. If that employee subsequently elects to be reinstated in the medical FSA, reimbursement may not be provided for claims incurred during the period in which coverage was terminated.

Sec. 125 Plans

Teachers` Post-Retirement Life Insurance Coverage

Employees of educational institutions can choose among cash, qualified benefits or post-retirement life insurance, provided the life insurance is paid up at retirement and has no cash surrender value. An "educational institution" for this purpose is defined as an organization that normally maintains a regular faculty and curriculum and normally has a regular student body enrolled and attending classes.

Sec 125 Plans

No long-term care policies

Long-term care insurance cannot be provided on a pre-tax, salary reduction basis under a flex plan. (It can be provided on an after-tax basis, however.)

Under a provision in the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as of January 1, 1997, employer-sponsored plans providing long-term care insurance may be treated as qualified accident and health plans under Code Section 106. However, HIPAA also stated that premiums for employer-provided coverage under a long-term care insurance contract are not excludable from employees` incomes if the coverage is provided under a flex plan. Similarly, expenses for long-term care policies cannot be reimbursed under a medical FSA.

The HIPAA provision prohibiting favorable tax treatment for long-term care expenses under a flex plan definitively clarified this issue. Previously, it was generally believed that the application of the Section 125 regulations prohibiting the use of contributions from one plan year to purchase a benefit that will be provided in a subsequent plan year should be interpreted to prohibit long-term care benefits under a flex plan. The new HIPAA provision has verified this interpretation.

Sec. 125 Plans

Adoption Assistance Benefits

A provision in the Small Business Job Protection Act of 1996 created a new tax exclusion (under new Code Section 137) for employer-provided adoption assistance benefits. The provision also allows individuals to claim tax credits for adoption expenses instead of excluding employer-provided benefits from their income.

Under the new Section 137, employers may provide employees with up to $5,000 tax-free for each adopted child or up to $6,000 tax-free for each adopted "special needs" child (see below). The adopted child must either have attained age 18 or be physically or mentally incapable of caring for himself or herself.

As of January 1, 1997, adoption assistance benefits may be offered as a feature of a Section 125 flex plan. For example, in the same manner as a dependent care flexible spending account (FSA), employees may set aside up to $5,000 (or $6,000) per child in pre-tax compensation. That money may be used for qualified adoption-related expenses (see below). Because of the high costs associated with adoption and the relatively high $5,000/$6,000 limits, employer contributions would have to be an important part of any adoption assistance programs offered under a flex plan.

Under Section 125 "use-it-or-lose-it" rules, contributions made in one plan year cannot be used in a subsequent plan year. Thus, any employees who utilize an adoption assistance program provided through a flex plan must make sure that any flex plan contributions earmarked for adoption assistance are used before the end of the plan year in which they are made.

Given this use-it-or-lose it restriction, coupled with the uncertainties inherent in the adoption process, it is likely that very few employees will elect to defer significant portions of their pay into a flexible spending account to pay for adoption expenses. It is more likely that adoption expense reimbursements will be offered under flex plans on a benefit credit basis.

For employees with adjusted gross incomes between $75,000 and $115,000, the amount of income that is excludable under Code Section 137 decreases proportionately; employees earning more than $115,000 are not eligible for the assistance. The IRS has not yet issued guidance as to how this phase-out applies if contributions are made through a flex plan.

The new Section 137 exclusion is effective as of January 1, 1997, for both special needs and other adoptions. The five-year program is set to expire December 31, 2001.

In addition to the $5,000 exclusion from income, Section 137 plans will have the following characteristics.

Plans will operate much like Code Section 127 educational assistance plans, with similar nondiscrimination testing requirements.

Employees who adopt special needs children will be able to exclude an additional $1,000 of reimbursed adoption expenses if they also do not exclude any federal, state or local adoption program grants. A special needs child is one who, at the state`s determination, cannot be returned to a parent`s home, or who cannot be placed easily with adoptive parents because of a specific factor such as ethnic background, age or membership in a minority sibling group, or a specific condition such as a physical, mental or emotional handicap. The exclusion will apply to the adoption of both foreign and U.S. children. For the adoption of foreign children, however, it will apply only if the adoption is finalized.

Qualified plan participants, if married, must file joint federal income tax returns.

Qualified plans must reimburse only qualified expenses, such as reasonable and necessary court costs, attorneys` fees and other adoption expenses. Expenses for surrogate parenting or adoption of a stepchild will not qualify for reimbursement.

Qualified expenses can occur and be excluded over more than one year. Reimbursements of expenses incurred before the provision`s January 1, 1997 effective date, however, cannot be excluded.

An employee who receives and excludes Section 137 benefits cannot also claim a tax credit for reimbursed adoption expenses, but can claim a credit for unreimbursed adoption expenses.

Participants must report the names, ages and Social Security numbers of their adopted children on their federal income tax returns.